Employees Not Using HSAs to Invest for Retirement Is a Problem

Many do not save for future medical needs, overlook investment options

Stephen Miller, CEBS By Stephen Miller, CEBS June 12, 2019
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Educating employees on how to best use a health savings account (HSA), especially for long-term savings and investment, is a challenge for employers that offer these accounts as part of their health care benefits.

"The growth in HSA usage and assets has been explosive, yet this is still a relatively new vehicle that is widely misunderstood," said Jack Towarnicky, executive director of the Plan Sponsor Council of America (PSCA), an employers' group. PSCA recently published its 2019 HSA survey report based on a benchmarking study it conducted with plan services firm Empower Retirement. The findings show that "plan sponsors have an opportunity to help employees understand how HSAs can be part of a holistic retirement savings plan," Towarnicky said.

HSA Investments

PSCA's survey showed that among nearly 200 plan sponsors that offered an HSA linked to a high-deductible health plan last year:

  • Less than 10 percent of the organizations surveyed use or suggest a default savings rate for employees' HSAs.
  • Although only 2.7 percent of organizations have the same investment lineup for their HSA as for their 401(k) or other defined contribution retirement plan, 10 percent of organizations with fewer than 50 employees use the same investment menu for both plans. This is probably because smaller employers are more likely to use their 401(k) firm to administer their HSA in a consolidated services arrangement, with integrated investment portals for both plans.

HSAs "can make a substantial difference in savers' abilities to fund their expenses in retirement, especially when contributions are directed strategically," said Empower Retirement CEO and president Edmund F. Murphy III. Employers should help workers "understand the best way to use these accounts to begin saving for their health care expenses in retirement," he advised.

[SHRM members-only HR Q&A: Are employer contributions to an employee's health savings account considered taxable income to the employee?]

Retirement Health Care Spending

Although 25 percent of HSA-holders said they are saving for health care expenses in retirement, only 7 percent report that they are investing account funds in stocks, bonds or mutual funds, according to an August 2018 survey on behalf of the nonprofit Employee Benefit Research Institute (EBRI), with responses from 2,010 adults.

A 2019 EBRI study shows the depth of the retirement savings shortfall and how many people underestimate how much money they'll need to pay for health care during retirement. Researchers, who analyzed data from various sources using a simulation model that allowed for the uncertainty of life spans, found that:

  • In 2019, a 65-year-old man with $79,000 in savings and a 65-year-old woman with $104,000 in savings have a 50 percent chance of having enough to cover Medicare and supplemental-plan premiums and median prescription drug expenses in retirement. For a 90 percent chance of having enough saved, the man needs $144,000 and the woman needs $163,000.
  • At age 65, a couple with median prescription drug expenses needs $183,000 in savings for a 50 percent chance of having enough to cover health care expenses in retirement. For a 90 percent chance of having enough, the couple needs $301,000 in savings.

"Employees may not realize they can save their HSA balances for expenses in retirement and that this can provide an important way to meet retirement spending needs," said Paul Fronstin, who directs EBRI's health research program.

The structure of HSAs makes them an attractive long-term investment vehicle, Fronstin noted, because:

  • HSAcontributions reduce taxable income.
  • Earnings on the assets grow tax-free.
  • Distributions for qualified medical expenses are not taxed.

In addition, HSA holders can withdraw funds for any reason after age 65 without penalty, although taxes apply to funds not used for qualified medical expenses.

HSAs "are actually more advantageous from a tax perspective than saving in a 401(k) plan or other retirement savings plan," EBRI's report stated.

Why Taxes Matter

As average life expectancy continues to increase, people "may need to plan on the probability of living much longer—perhaps 30-plus years in retirement," noted Robert Massa, managing director and retirement practice leader at Qualified Plan Advisors in Houston. For retiree health expenses, benefit managers should advise employees to consider "investing a portion of your portfolio for growth to maintain your purchasing power over time," said Massa, who will be presenting on the topic "How Can HSAs Boost Retirement?" on June 24 at the Society for Human Resource Management's Annual Conference & Exposition in Las Vegas.

Because HSA dollars are not taxed for out-of-pocket health care costs in retirement, using HSAs for these expenses can be more cost-effective than using traditional 401(k) funds, he pointed out. For a couple in the 24 percent tax bracket, $399,000 saved in an HSA would be equivalent to $525,000 in a 401(k) before taxes. For couples in the 35 percent tax bracket, $613,846 would be the equivalent amount needed in a 401(k).


HSA Balance Drawbacks

While most people have not saved nearly enough to supplement Medicare after they retire, they've accumulated HSA balances that nevertheless are large enough to prompt them to spend on unnecessary health care during their working years, EBRI found.

"Larger HSA balances may be viewed as free money to pay for current health care," Fronstin said at an EBRI policy forum in Washington, D.C., last month. He noted that HSA balances can have effects similar to those that occur when employers have spent enough to satisfy their annual plan deductible, triggering full insurance coverage of subsequent health expenses for the year. Once that happens, people are less likely to act as savvy consumers who evaluate whether a particular health care service is truly needed or whether there are cost-effective alternatives.

Examples of low-value services, Fronstin noted, are available from the Choosing Wisely campaign, an initiative of the American Board of Internal Medicine Foundation that helps people choose care that is supported by evidence, is not duplicative and is truly necessary.

With a balance in their HSAs, people tend to overuse low-value, discretionary services. Having cash at the ready "affects things that you may otherwise think twice about. 'Do I really need this X-ray? Do I really need an MRI? Should get an X-ray instead of an MRI?' " Fronstin said.

HSA balances also increase the use of emergency department services for nonemergency care, EBRI found.

"Most people are rolling over money [from year to year]. Most people are building up an account balance despite the fact that they're taking distributions" for current health care needs, Fronstin said. Based on data from the EBRI HSA database of 5.9 million accounts:

  • HSAs opened in 2017 had an average balance of just under $1,100 at the end of the year.
  • HSAs opened 10 years earlier had on average almost $8,400 at the end of 2017—not enough to fund retiree health care but sufficient to prompt unnecessary spending.

Although EBRI didn't address the issue, investing a portion of HSA money for long-term capital growth might alleviate having account dollars so easily accessible that they undercut incentives for cost-conscious health care spending.

Related SHRM Articles:

2020 HSA Limits Rise Modestly, IRS Says, SHRM Online, May 2019

Tear Down the Silos Between Employees' HSAs and 401(k)s, SHRM Online, June 2017

Address HSA Misconceptions During Open Enrollment, SHRM Online, October 2016

HSA Tax Benefits Often Overlooked, SHRM Online, July 2016

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